We work with a good number of cannabis companies with multiple government operators (MSO). Always have. Most of these companies are publicly traded, but others remain closely related. With more MSOs than ever before, it seems like a good time to list some pitfalls for MSOs, their decision makers, lenders, etc., as these companies stretch across state lines and even internationally.
Hire the wrong people
There are many clichés about the motto “A company is only as strong as its employees”. These clichés may feel bland, but they also tend to be true. Many cannabis MSOs suffer from poor leadership, which can be compounded by inadequate compensation structures. Here is an article from last fall about Aurora paving out in the wake of mass layoffs and a reported loss of $ 2.3 billion in executive rewards. Those are oversized numbers, but this is not uncommon in public cannabis companies of various sizes.
That said, it’s not just about C-Level. It is particularly important for newer and smaller MSOs to have strong staff on site. Some of our MSO clients have excellent grinders who are fluent in networking, clearing nonsense, making the right local connections, identifying strong acquisition targets, and so on. These MSOs understand the markets they are buying in and make informed decisions. The same rule applies to on-site recruitment. For example, it is great to have a fleet of stores, but much better when those stores are maximally profitable. The local management makes the difference there.
Buy the wrong things
This ties in with the point above. We have seen (and admittedly helped) cannabis MSOs buy all sorts of things that should never be bought – at least not for the prices paid. I helped MSOs buy companies and sell them for pennies on the dollar two years later. I’ve also helped buy companies for MSOs that are down a year or two later with an acquisition. If a deal doesn’t come off I’ll give the client some general thoughts, but at some point the lawyer’s job is to hold his nose and paper things.
Often times, MSOs buy things (with other people’s money) just to buy. Companies fight for market share; or the MSO has publicly announced that it has closed an amazing XYZ deal; or the MSO is under pressure to quickly return capital to investors; or it wants to look active to attract more investment; or the leadership is unsure when another deal will come about in a particular jurisdiction; etc. There are all kinds of motivations and pressures to “move forward”. However, if a coherent strategy regarding markets or operations does not exist, the chances of success are quite slim.
Announce things that will never happen
That happens very often! Everyone loves a good press release. Read them carefully. There are MSOs that should remain unnamed and always announce things, rarely get through and never make money. An example of this is the multitude of zombie cannabis companies on the Canadian Stock Exchange that have renamed themselves psychedelics companies and / or issued press releases last year about their psychedelic “initiatives”. These publications say things like, “We have made a no-obligation purchase [whatever psychedelic research company] to treat with its valuable formulations [anorexia or depression or some other thing] by [issuing super cheap common shares or warrants and paying some cash]The completion of the transaction is subject to a satisfactory due diligence. “These announcements are designed to raise a company’s profile and attract investment. In the short term, the announcement can have limited positive effects. In the long run, the opposite will be true.
Lack of focus
This is the most common problem of all and is related to everything that has been written above. A successful MSO will understand exactly: 1) where the discrete market opportunity lies; 2) how to perform; and 3) when to run (or not). I am often surprised at the kind of questions I am asked in the midst of a transaction, such as market characteristics and trends in Oregon. Or I’m interested in learning about another deal the MSO is handling at the same time, with a different angle in a different jurisdiction and with no discernible synergy. Sometimes a cannabis MSO will move from one shiny price to the next with no underlying strategy or long-term vision.
True story: a few months ago I received a call from a large private law firm that we have supported over the years. This law firm does a lot of advertising in the cannabis space and is Chambers-rated and all sorts of things. I like her. The lawyers wanted to discuss a “last minute disclosure problem” on a mid-close deal. In the solicitation, the attorneys explained how the disclosure was tied into a complex business structure they created to avoid a “non-resident ownership problem” for the acquiring MSO. Friends – Oregon has had no residency requirement for owning cannabis businesses for the past five years. That call was pretty awkward and I don’t know what happened next.
When our MSO customers go to other states, I never want to do those deals. I don’t care if anyone else earns the dues. I don’t know the local rules. and even if I can research them, much of what I need to know in order to get the best possible value is not available online. Without exception, I will either hire a Harris Bricken attorney (if we have an office in that state) or I will direct the client from another solid law firm to a good local attorney. Too often, however, I see MSOs trusting that a lawyer or law firm is good enough to do their business across the country. Better to work with someone who is qualified. The value will be there.